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Sweet Ones, Inc. v. Mercantile Bank of Michigan

April 23, 2010

SWEET ONES, INC., A MICHIGAN CORPORATION, PLAINTIFF,
v.
MERCANTILE BANK OF MICHIGAN, A MICHIGAN BANKING CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Hon. Robert J. Jonker

OPINION AND ORDER

This matter is before the Court on Defendant Mercantile Bank of Michigan's ("Mercantile") Motion to Dismiss for Failure to State a Claim (docket # 16). The parties have not requested oral argument on the motion, but the Court did hear oral argument on Plaintiff's Motion for Preliminary Injunction (docket # 3) and Defendant's Motion to Dismiss for Lack of Subject Matter Jurisdiction (docket # 7). That oral argument anticipated the issues raised by the current motion. Moreover, the Court has thoroughly reviewed the parties' motion papers and all other matters of record, and has carefully considered the applicable law. The matter is ready for decision.

Factual Background

Plaintiff Sweet Ones, Inc.'s ("Sweet Ones") only business is the purchase and resale of perishable produce, and all of its cash and accounts receivables come from the sale of perishable produce. (Compl., docket # 1, ¶ 6.) On April 10, 2009, Sweet Ones entered into a business loan agreement with Mercantile, pledging its cash and accounts receivables as security for the loan. (Id. at ¶ 10.) The loan matured on July 10, 2009, and Mercantile did not renew the loan. (Id. at ¶¶ 10, 11.) Sweet Ones made four principal payments on the loan between September 2, 2009 and October 28, 2009, for a total amount of $50,000. (Id. at ¶ 14.) On October 29, 2009, Sweet Ones notified Mercantile that it believed that any collection actions by Mercantile against Sweet Ones would cause Sweet Ones to breach a trust created by the Perishable Agricultural Commodities Act, 7 U.S.C. §§ 499a -- 499t, ("PACA"). (Id. at ¶ 16.) Nonetheless, on November 4, 2009, Mercantile set off $63,225.07 from Sweet Ones's bank account with Mercantile. (Id.) Because of the set-off, Sweet Ones could not pay its produce suppliers. (Id.) On November 9, 2009, Mercantile further exercised its rights as a secured creditor by notifying Sweet Ones's customers that payments owing to Sweet Ones should be sent directly to Mercantile instead of to Sweet Ones. (Id. at ¶ 17.) Sweet Ones filed this lawsuit, which is premised on the theory that Mercantile caused Sweet Ones to breach obligations under PACA, on December 3, 2009. As of that date, Sweet Ones owed $294,749.20 to produce suppliers whom Sweet Ones describes as "valid PACA trust beneficiaries." (Id. at ¶ 20.) Sweet Ones itself is a commission merchant, dealer, or broker subject to PACA. (Id. at ¶ 5.) No actual PACA trust beneficiary has joined the lawsuit.*fn1

PACA

In 1930, Congress enacted PACA to encourage fair trading practices in the marketing of perishable commodities by suppressing unfair and fraudulent business practices in the marketing of fresh and frozen fruits and vegetables... and [by] providing for collecting damages from any buyer or seller who fails to live up to his contractual obligations.

H.R. REP. No. 98-543, 98th Cong., 1st Sess. (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406. Congress amended PACA in 1984 to more effectively protect sellers of perishable agricultural commodities ("produce"). Congress recognized that time constraints inherent in selling produce often required sellers of produce ("sellers") to sell their produce to commission merchants, dealers or brokers (collectively, "buyers") before ascertaining the creditworthiness of buyers. Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995) (citing JSJ Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 77 (2d Cir. 1990); H.R. REP. No. 98-543, 98th Cong. 1st Sess. 1983, reprinted in 1984 U.S.C.C.A.N., at 406-07)). Under such circumstances, sellers typically became unsecured creditors of buyers, able to recover from defaulting buyers only after lenders holding security interests in defaulting buyers' assets recovered in full. Id. Often, after secured lenders had collected on their security interests, no assets with which to pay sellers remained. Id. To guard against such situations, Congress added Section 499e(c), which provides that

[p]erishable agricultural commodities received by a commission merchant, dealer or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.

7 U.S.C. § 499e(c). The statutory trust gives sellers a right to recover against buyers superior to that of all other creditors, including secured creditors. Endico Potatoes, 67 F.3d at 1067 (citing 7 U.S.C. § 499e(c)(1); Tom Lange Co. v. Lombardo Fruit and Produce Co., 12 F.3d 806, 809 (8th Cir. 1993); Regulations under the Perishable Agricultural Commodities Act, 49 Fed. Reg. 45735, 45738 (1984)); accord Sanzone-Palmisano Co. v. M. Seaman Enters., Inc., 986 F.2d 1010, 1012 (6th Cir. 1993) (quotation omitted).

PACA further provides that any buyer who fails to maintain the PACA trust "shall be liable to the person or persons injured thereby for the full amount of damages... sustained in consequence of such violation." 7 U.S.C. § 499e(a). Under the statute, "such liability may be enforced either (1) by complaint to the Secretary [of Agriculture]... or (2) by suit in any court of competent jurisdiction." 7 U.S.C. § 499e(b). PACA states that federal district courts "are vested with jurisdiction explicitly to entertain (i) actions by trust beneficiaries to enforce payment from the trust, and (ii) actions by the Secretary [of Agriculture] to prevent and restrain dissipation of the trust."

7 U.S.C. § 499e(c)(5). The statute does not expressly provide for enforcement by persons other than trust beneficiaries and the Secretary of Agriculture. It is undisputed that Sweet Ones is neither.

Sweet Ones brings four federal law counts against Mercantile, all based on a theory that Mercantile's otherwise valid collection actions have caused Sweet Ones to breach its obligations to pay sellers from whom it has purchased produce and who are the beneficiaries of the PACA trust. (Compl., docket # 1, ¶¶ 20-47.) The question is whether Sweet Ones states a valid claim for relief under federal law.

Jurisdiction

That the statute's jurisdictional grant does not mention claims by persons other than trust beneficiaries and the Secretary of Agriculture raises a preliminary question of whether federal district courts actually have subject matter jurisdiction over PACA claims, such as those before the Court, brought by neither a trust beneficiary nor the Secretary of Agriculture. The parties debated this question in earlier motion proceedings, and the Court denied without prejudice Mercantile's motion to dismiss under FED. R. CIV. P. 12(b)(1). (docket ## 7, 15.) As more fully articulated in those earlier proceedings, this case hinges on the interpretation of PACA and the rights, if any, available to Sweet Ones under PACA. The ...


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